Guess Who Is NOT "Rotating" Out Of Treasurys

If one reads sellside research (especially that of Bank of America or Goldman), if one listens to comedy-finance fusion TV channels, if one reads newspapers, one can't help but be left with the impression that everyone and their grandmother is now dumping Treasurys and buying stocks. Why - because this is a key part of Bernanke's latest masterplan (which is the same as all his previous "masterplans", which have failed so far about 4 times previously) to force what little retail investing capital is left out there out of the safety of bonds (return of capital), and into stocks (return on capital). The catalyst? This time, for real, central planners will generate enough (controlled) inflation to create losses for anyone holding long duration paper (such as the Fed of course, whose DV01 is the biggest in the history of the world at over $2 billion, but we digress). So just to test whether or not this was indeed the case, we decided to go to the source data for what the smartest money of all is doing: the 20 or so (RIP 21st PD MF Global) primary dealers. After all, if everyone is dumping Treasurys over fears of an imminent surge in yields, and rotating into stocks, it would be them right? Well, the result is charted below: we present it without commentary.

OK, a little commentary. Yes, the black line just hit an all time high, confirming that while everyone else may be selling, the Dealers, the smartest people: those who not only get an advance notice from the Fed itself, but provide feedback on what it should do, are not only not selling, they have never owned more Treasurys than they do now...

Cullen Roche has an interesting article where he argues that the Fed is not monetizing the debt. I like to think that I'm of at least average intellect, but I'm finding it a very abstract essay for whatever reason:

Think about what we are talking about here.....the end of the worlds reserve currency. It may take a little while...This cockRoche like to poke fun at Schiff for being wrong. He obviously did not see the hundreds of economists that mocked Schiff about the 2008 crash. He just can't wait to get in line to get steamrolled this time. Maybe in his mind any publicity is good publicity.

Indeed. Roche is a paradox to me, because once in a while, he'll write something spot on, yet other times, he's so far off the mark that it's hard to believe a person is capable of thinking & writing in such an inconsistent way.

At Silverdocs.com we hear that when the FDIC insurance ends on Dec. 31 and all this newly uninsured institutional money is now forced into the safety of short term Treasuries -cue canned laughter- then NIRP goes wild, and the Primary Dealers are proven right once again.

Fonz - that's the thing that gets me - the world's reserve currency blowing up. Never happened before. It's not simply the size of the debts; huge as they are and worldwide to boot, but the fact of the most widely accepted currency around the world teeters like a seesaw over the precipice while the Fed piles more debt on the dangerous end of the board.

There seems to be no better currency ready and able to supplant ours so if we do blow up due to, say, an overnight popularity reversal, wouldn't that lead to war as cross border flows stop, unpaid liabilities freeze commerce and there's NO ONE big enough to bail the US.gov out? I find the risks here unbelievable.

Somebody shoulda just up and shot Mr. Keynes before he got too big to fail.

That guy is an FN moron. The Fed is defacto buying debt with printed money. The Fed pays back interest payments that it receies to the Treasury. That is the definition of monetizing the debt. His has no point to make other than he wishes he understood economics. Nothing he wrote is even related to the topic. It was the Chewbacca defense.

That may be my investment plan for next year. Enough with the market. I will buy $500 of stamps and send out a cookie cutter "I saw you with that midget" letter to a random group of people. No details, nothing malicious. I bet at least a few people still send me a check.

Since 2008 they have been paid to hold onto them and that's risk free so yes you could say he has a printer for them

How Bernanke Can Get Banks Lending Again
If the Fed reduces the reward for holding excess reserves, banks will have to find something else to do with their money, like making loans or putting it in the capital markets.

snip

The Fed sees this as a radical change. But remember that it paid no interest on reserves before the 2008 crisis and, not surprisingly, banks held practically no excess reserves then. In early October of that year, Congress gave the Fed authority to pay interest on reserves, which it promptly started doing. When the Fed trimmed the federal funds rate to its current 0-25 basis-point range in December 2008, it also lowered the interest rate on reserves to 25 basis points, where it has been ever since.

But suppose it doesn't work. Suppose the Fed cuts the IOER from 25 basis points to minus 25 basis points, and banks don't lend one penny more. In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal fees from banks. That would be almost an $8 billion swing from banks to taxpayers. There are worse things.

At this point say the fed was to get rid of the excess reserve rate and it worked- banks started lending. Couldn't that also be detrimental as it will flood the economy with liquididty from QE which wouldn't keep up with demand?

If all public companies were both efficient and trustworthy, Ben's plan might actually work. But Bernanke has never worked for a public company and nor is he an experienced trader. Therefore his effort to put wealth towards productive purposes will simply add to the massive bonfire of malinvestment, fraud, mismanagement, corporate graft and executive fleecing. What Bernanke fails to understand about his master plan is that corporations are not able to invest any better than people in environments where profits are irrational and unearned. These policies create corporate asset bubbles in aquisitions, material, personel, technology, inventory and in every conceivable expenditure. Bernanke is creating an unprecedented era of corporate inefficiency.

What creates real efficiency and competition are not eras of wealth and largesse, but eras of scarcity and change. A good analogy is that war creates better armies and better weapons, not prolonged periods of peace. Bernanke of course has zero understanding of what happens to large companies when financial reality is made irrelevant, and capital is made plentiful. (Growth and efficiency are by no means a logical result). This is what happens when academics who are deeply inexperienced in business run monetary policy designed to stimulate business. The market is going to bend him over the table and humiliate him eventually. And then all that capital that he injected into the market is going to evaporate, and a generation of Americans will be financially obliterated.

Great post. I agree with 99% of what you've said. My one point of contention would be that the Fed is concerned with stimulating business. The only business the Fed is concerned with stimulating is the Banking business, and they sure as shit are stimulating the hell out of the banks!! If there happens to be a corollary benefit to "other" businesses, then all the better. But first and foremost, the Banking system must be taken care of. How long until the banks are healthy again? Despite all of the recovery proclamations, no one truly knows (except the Fed and the Banks) due to the continued suspension of FASB mark-to-market rules.

It probably won't change next year. Maybe not even the year after. But when it changes no one will be kind enough to tell you in advance. Luckily your face will get ripped off so fast you may not feel the pain.

If you're older than 60, you don't have to stay in. You make your money over a couple of years and stand down into cash. $30K/yr funds a nice life for your final 20 yrs if you own your house outright.

After you have cash, 30K/yr X 20 yrs to age 80 is only 600K, required. If inflation heads up, buy TIPS, but owning your house outright eliminates rent inflation, which would be the primary source.

An awful lot of guys on ZH are not calibrated on where the money is. Old ppl have had a lifetime to accumulate. Young ppl have not. You have to think like a scared old person to know where it's going to flow.

Old people can't/won't wrap their mind around the fact that this is unsustainable. If you are 60 plus, the idea of a "reset" is not very palatable. The young people won't have much fun with it either. Like Kyle Bass said last night, it's not an if anymore it's a when.

For the over 60 set (I've been there for a decade), inflation and ZIRP is the killer. Deflation would be a windfall (if the kids and grandkids don't show up on the doorstep with luggage). I am sure we will see both inflation and deflation but the sequence and timing is unknowable, at least to me.

I have been edging out of the system for many years. No debt, more tangibles, and less money on deposit with financial institutions of any kind. I quit pricing silver and gold in dollars and started thinking about them in terms of things I will need. For example, an ounce of silver is about 10 gallons of gasoline or 20- 25 loaves of bread. Fifteen ounces of gold is a modest funeral and twenty is a modest new vehicle. I set aside 15 ounces of silver and call it a month's utilities. Overall, I think I need about 100 oz of silver for a month's living expense.

Gold looks overpriced to me right now so I am buying more silver than gold. It has varied over the years but pricing PM's in essentials instead of dollars offers a different perspective.

It takes a lot of years to move money out of the regular IRA or 401-k and out of the financial system without moving into higher marginal tax brackets or paying penalties. If you are under 60. Smallish 401-k loans help some if you employer allows them. Sadly, all the silver and gold was lost in a burglary and insurance didn't cover it. That happened while I was worrying about boating accidents ...

But if no one is buying at the auctions... the PD´s have to buy them....that is why they are PD´s....so either they are buying them because they think they are a good deal...or they are forced to buy them...because no one else is?????

The Fed is printing "new" money (inflation) to buy those bonds, and will hold those bond forever. This dept destruction via the Fed. Free money for the government (USA). We will never see hyper inflation because it's being done slowly. But there will be inflation from all that money they are printing this time. I'm looking for a disconnect from the paper Gold, and the physical Gold.

PD holdings are at a record high because they HAVE to buy at auctions, which by desing, cannot fail. The record holdings by the PD's just means there is a RECORD of less buying by entities other than the PDs.

Actually no: the Fed promptly monetizes all gross 10Y+ exposure onboarded by the dealers via POMO in the $45 billion of 7/10/30Yr flow monthly (the right end of Twist which going forward will not have the Fed selling the short end). Observe how quickly any given cusip is consumed by the Fed in POMOs following any given auction up to the 70% threshold.

On a net basis, the ONLY window where dealers maybe should have a notional position is, ironically, in the 6-11 hump where until now the Fed was far less active, and where PDs in fact have a net short exposure.

And Dealers have always HAD to buy at auctions, not just in the past 6 months.

P.S. one thing not mentioned is that MBS holdings recently also hit an all time high, at $94.4 bn a week ago.

Would that then mean that they are holding for larger capital gains in the future? Or is this just a matter of so much liquidity, that not all of it can go into equities, in the interest of some diversification? Or is this just a bet that equities are primed for a tumble?

Is that the same Bank of America that doesn't want its foreclosed account-holders to know that it is flipping mortgage paper daily to the Fed and pocketing the profit? Just checking.

Mortgage-based hedge funds are up how much on the year? 25-30%?

With the promise of a Fed Treasury bid of last resort, just like the MBS market, the Treasury market is now the source of capital gains and the equities market is the source of income (dividends). Just as it was during the First Great Depression.

Welcome to the upside-down world of Ben "Humpty-Dumpty" Bernanke. Food stamp, anyone?

I know this is kind of off topic but.. I saw a statistic earlier today on twitter which said about 30% of interest to be paid on the national debt in 2012 is to be paid by the Fed. I know this because of all the QEs. But I wanna make sense in my head as to how it's actually bad for the govt interest to be paid by its own federal reserve. What are the negative implications of actually owning your own debt like in this case.

Thanks to anyone who can provide some color on this to me.. Im trying to be educated and prepared

It is brilliant in its simplicity - Fed buys all of Treas debt, holds it to maturity, gives it back, and presto, the fed balance sheet goes to zero, and the debt is wiped out. Any fool can see it is the smartest thing on planet earth. Just try it; do it with your wife. Simple. Hmmmm...............................

Thanks but I still don't really understand it. My guess is that in order to keep buyig treasurys they will have to keep printing which will eventually cause severe inflation? Sorry I dont have a wife yet I'm only 19:)

You are correct - it will cause INFLATION. My note was a spoof. But you need to stop using that word; it can be a great cause of confusion. The better concept is the loss of purchasing power of your money, per unit, e.g., the dollar. Go ask your parents how much they paid for an item of food (basic stuff) 10, 20, 30 years ago. Then ask how much they got paid per hour, day, week, month, etc. Do the math to compare the cost of consumption - yours and theirs. what is the difference? Really! How much and what has changed. Compare the amount of work to get the ncessity - then you will see what is going on. Avoid comparing items of technology; except for front line fighter aircraft. Go to historical articles and comjpare the cost of a 1960's F-4 phantom during the Vietnam War, and the projected cost of an F-35. Then think deeply about these relationships. Very smart of you to be asking questions!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Thanks for your answer. Now what confuses me is Japan to my knowledge, I could be wrong, theyr central bank owns a much larger % of their debt then we do. And I know from reading here that they have been easing for much longer. From the outside it dosnt seem that they are in that much trouble and their currency is still very strong relative to the USD which confuses me because I thought easing and monetizing debt basically debases currency and diminishes purchasing power?

All fiat currencies are circling the same drain, attempting to be the last one to go down. Japan is a lot closer than most others. They've been monetizing for over twenty years, however they had a trade surplus and a high savings rate to support it. Now all those savers are retiring and will begin drawing on the pensions holding all that debt internally; who are the postal savings system and public pensions going to sell their yen bonds to? Their trade surplus has evaporated; suspect they're much closer to the endgame than anyone there would care to admit.

this should not be surprising. they are required to buy the supply from the treasury. if there is not equal demand to purchase from the PD's they end up with the surplus even if they don't want it. even with the fed now showing up with $45B/mth newly created $ (from QE4), this still will not be enough to buy all the new debt being created by the treasury (depending on the cliff resolution, they'll still be issuing nearly $1T/year). expect the black line on this chart to keep going up even with QE4, regardless of what the PD's want to do, if there is no one to sell them to, they have no choice but to hold.

To say he (Bernake/ The Fed) is not "monetizing" the debt, buy buying T-bonds, T-bills, T-Notes, MBS, or whatever the fuck - is complete nonsense. The exact same amount is being spent by the Government Agencies, Departments, etc INTO the USA and world economies. That is why they call it the defecit. So how does this not get to 20T and beyond in no small amount of time? Beause Congress will act? Raising my long dead mother from the grave is more probable. We are fucked; and the day of reckoning will come. But probably not for awhile ... as more and more "creative" people devote more and more time and effort to developing ways to financially cope; INSTEAD of more and more effort to creat goods and services.

All this gold raid does is make me nervous about stocks. It just looks like capital flight from US markets due to dollar devaluation. 1987 all over again, but this time there really is no reason to like our economy. I'd prefer it was manipulation, because as a market force, combined with Treasuries dipping, it is sending me all the wrong signals.

Big Ben is not issuing dollars into the economy, he's switching one federal security (Ts and MBS) for another (bank reserves). One would have to believe banks' lending is constrained by their reserves to conclude substantial more reserves equates to substantial more dollars circulating in the economy - belief in that fallacy keeps one clueless.... eventually possible penniless.

True! Which makes it all the more comical to watch the talking heads on CNBC pumps stocks by saying QE has to go somewhere. It's called 'debt saturation', where the all trillions they print fall into the black hole of Government debt.